TREASURIES-U.S. yields sink after data shows economy slowing as rate hikes start to bite

BY Reuters | ECONOMIC | 01/06/23 04:10 PM EST
    (Adds comment, updates prices)

      U.S. jobs rise more than expected, but wage gains slow

      U.S. services sector contracts in December; factory orders

      U.S. rates market prices in 25-bps hikes in next two

      U.S. two-year/10-year curve lessens inversion after slew
of data

    By Gertrude Chavez-Dreyfuss
       NEW YORK, Jan 6 (Reuters) - U.S. Treasury yields tumbled
on Friday after data showed signs of an economy slowing down as
wages rose less than expected last month even though new jobs
increased more than anticipated, while the U.S. services sector
shrank for the first time in more than 2-1/2 years.
    U.S. factory orders declined in November as well after
posting gains in the previous month, suggesting, analysts said,
that along with other pieces of economic data, past rate
increases by the Federal Reserve may be finally taking their
toll on the economy.
    Friday's reports also reinforced expectations that the Fed
could be nearing a pause in its rate-hiking cycle.
    U.S. yields across the curve mostly dropped to two-week lows
in the aftermath of the services sector and factory orders data.
    A widely tracked part of the U.S. yield curve, measuring the
gap between yields on two- and 10-year Treasury notes
, lessened its inversion to -70 basis points
(bps). The inversion, which typically foreshadows recession,
went as deep as -79.20 bps right after the jobs report, the most
inverted in three weeks.
    The narrowing of the curve inversion on Friday indicated
that investors are pricing in fewer rate hikes by the Fed.
    Data showed that U.S. non-farm payrolls rose 223,000 last
month. Economists polled by Reuters had forecast payrolls
increasing by 200,000 jobs.
    Average hourly earnings rose 0.3% in December after 0.4% in
the prior month. That reduced the year-on-year increase in wages
to 4.6% from 4.8% in November.
        "The bond market is anticipating that the Fed is getting
closer to the end game. But it's not very clear where the Fed
winds up," said Gregory Faranello, head of U.S. rates at
AmeriVet Securities in New York.

        "The Fed still has work to do. They want to get to
around 5%. But the reality is the cost of funding at 5% -- if
they hold it there and have the perseverance to hold it there --
will have implications for the market and inflation, which they
want to come down," he added.

    U.S. data also showed that the Institute for Supply
Management's (ISM) non-manufacturing index dropped to 49.6 last
month from 56.5 in November. It was the first time since May
2020 that the services reading fell below the 50 threshold,
which indicates contraction in the sector that accounts for more
than two-thirds of U.S. economic activity.
    Paul Ashworth, chief North America economist, at Capital
Economics wrote in a note that the ISM data showed "more
evidence of disinflationary pressure but, unlike the employment
report, consistent with recession rather that a soft landing."
    U.S. factory orders also slumped, falling 1.8% in November
after gaining 0.4% in October.
    In afternoon trading, U.S. 10-year yields slid
to two-week troughs of 3.551%. The yield was last down 16.6 bps
at 3.556%.
    U.S. 30-year yields also declined to a two-week low of
3.671%, last down 11.6 bps at 3.682%.
    On the shorter-end of the curve, U.S. two-year yields also
stumbled to the lowest in two weeks of 4.245%. They last traded
down 19.9 bps at 4.253%.
    The rate futures market has priced in 25-bps hikes at the
next two policy meetings. The peak fed funds rates is seen at
around 4.95%, expected to be reached at the June policy
    In other parts of the Treasuries market, U.S. breakeven
inflation rates were mostly lower, reversing earlier increases.
    The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) slipped to
2.221%. The five-year breakeven rate meant that investors expect
inflation, as measured by the consumer price index, to average
around 2.221% over the next five years.
    The 10-year TIPS breakeven rate was last at
2.206%, down 2.1 bps.
      January 6 Friday 3:48PM New York / 2048 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             4.5075       4.6204    -0.002
 Six-month bills               4.65         4.8255    -0.023
 Two-year note                 99-252/256   4.2578    -0.195
 Three-year note               100-8/256    3.9877    -0.214
 Five-year note                100-194/256  3.7066    -0.204
 Seven-year note               101-108/256  3.6422    -0.189
 10-year note                  104-168/256  3.5599    -0.162
 20-year bond                  102-12/256   3.8512    -0.121
 30-year bond                  105-192/256  3.6807    -0.117

                               Last (bps)   Net
 U.S. 2-year dollar swap        29.50         1.25
 U.S. 3-year dollar swap        11.00         0.75
 U.S. 5-year dollar swap         0.25        -0.25
 U.S. 10-year dollar swap       -6.00        -0.75
 U.S. 30-year dollar swap      -46.75        -0.50

 (Reporting by Gertrude Chavez-Dreyfuss; Editing by David Evans
and Andrea Ricci)

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